Practically every new mobile device today uses flash memory for storage -- are the parallels obvious?

One attendee at the Samsung FutureUnlimited conference
described NAND factories as "the digital equivalent of an oil
well." It's certainly not hard to link the incredible margins of
NAND memory to that of the world's largest commodity, but the similarities don't
stop there.

An industry that totaled just one billion dollars in 2001 will eclipse the
entire DRAM market within the next two or three years, totaling just over $15
billion in revenue last year. Conservative estimates put the 2008 revenue
total at $21 billion.

The world's insatiable appetite for solid-state memory dominates every facet of
portable electronics, and with
the introduction of 64GB and 128GB solid-state hard drives, the desktop is
next.

In just the last year, the major flash memory players sunk incredible amounts
of money into new facilities. Toshiba and SanDisk announced a
joint-venture estimated to cost $16.7 billion to build three NAND factories in
Japan. Samsung's one million square-foot NAND fab under construction in Austin
is the largest single foreign investment in the U.S. ever; an appropriate home
for digital Texas Tea.

Apple,
Intel and SanDisk, to name just a few, adjusted earnings based solely on NAND
pricing projections. Cheap, ubiquitous flash memory is bad for suppliers like
Intel, but good for consumers like Apple. The inverse is true during a
shortage.

"Pricing has moved very rapidly, much more so than we thought," Intel
CEO Otellini admitted earlier this week.

Samsung vice president of memory marketing Jim Elliot believes a fundamental
change will occur with flash memory this year. "We're going to see a
psychology change this year. The stair-step model for NAND pricing
will become a sideways S-curve." Elliot then flipped his slide deck
to a picture of Sigmund Freud with a squiggly line on his forehead.

An outage last August at a Samsung NAND fab cost the company a
"mere" $54 million in lost revenue, but it propelled the memory
industry into speculation and unstable prices for months after. Similar
trends occur in the oil market when a refinery malfunctions.

"In the past, NAND prices tended to exhibit trends of oversupply and falling
prices, followed by undersupply and flat prices," Elliot elaborated.
This is a trend typically found in markets like microprocessors.
"Moving forward, instead of minimizing inventory risks, we project companies will opt for
strategic buy-aheads to take advantage of rise-and-fall price fluctuations." This trend
is more akin to the jet fuel market.

What Elliot describes is a bonafide futures market. The end result for
consumers? As the NAND market begins to stabilize, we'll stop seeing the
price-per-gigabyte halve each year, and we'll stop seeing companies
dramatically adjust earnings based a market that isn't as volatile.

With so many competitors in the NAND production game, it only takes a new
factory or outage to upset the delicate spot market pricing. But as more
companies like Intel and Apple begin to adopt the S-curve mentality, consumers
will ultimately benefit from companies that can project supply and pricing for
longer periods of time.

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